CRJ 312 Exam 2 Class notes

Corporation

"An association of shareholders created under law and regarded as an artificial person by the courts; "having a legal entity separate from the individuals who compose it; with the capacity of succession; exercising such powers that may be conferred on it by law just as a natural person". Corporations issue a "stock certificate" to show ownership rights of the shareholder Corporations are either · Privately companies · Publicly traded companies A "private corporation" restricts the issuance and ownership of company stock to designated individuals A "publicly traded corporation" is a corporation that issues stock that anyone can buy (Amazon, Apple, IBM, etc.)

Public Corruption- Legislative government

(always elected) US Congress ( Senate and House) State legislators

Public Corruption- Judicial government

(local are elected, federal are appointed) Judges, hearing examiners Historical Views of Public Corruption Corruption is not a new or contemporary problem in the US Framers of the US Constitution in 1787 worried about public corruption in the new Republic Gift giving and its' link to corrupt government had been widespread in France and England Federalist Papers were publications that augmented the US Constitution They contained many references and concern about how corruption could harm the new government James Madison - expressly concerned about the power of political appointments and job perks.

Public Corruption- Executive Branch

(some elected, some appointed) Mayors, governors, prosecutors, police officials

Ponzi's vs. Pyramid (multi-level marketing)

- "Ponzi" Passive Investment: Victim provides funds to individual who "takes over" and waits for returns. In most cases the investment vehicle is based on fraudulent securities, that do not exist Investors become true victims Ponzi cannot sustain itself and investor looses his money Usually only initial investors make money -Pyramid Active Investment: Victim must participate in business venture through recruitment of others and sale of merchandise Pyramids generally involve some consumable "product" for sale; however in PYRAMIDS real profit comes from the new members' investment Investors can become conspirators and can be criminally charged Pyramid cannot sustain itself, late investors loose their money

More stock trading 101 in notes

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Sources of Corrupt Income

1. Outright bribes 2. Taking payoffs for legislative help 3. Taking kickbacks from projects 4. Taking campaign contributions in return for official favors 5. Gifts 6. Use of vehicles 7. Vacations 8. Siphoning from non-profits and charities 9. Allowing non profits to pay for personal items or services 10. Unauthorized labor Using staff paid by taxpayers to perform personal services of the public official; not related to official duties 11. Hiring friends and relatives to work as "ghost employees" (getting paid for not showing up)

Federal Corruption CRIMES

1. Racketeering 18 USC 1962 2. Aiding and abetting 18 USC 2 3. Wire Fraud 18 USC 1343 4. Mail Fraud 18 USC 1341 5 Honest Services Fraud 18 USC 1346 6. Bribes concerning federal funds 18 USC 666 7. Money Laundering 18 USC 1956 8. Extortion 18 USC 1951 9. Conspiracy to defraud US 18 USC 371 10. False Tax Returns 26 USC 7206

Ponzi- how does it work?

1.Need individual investor(s) believing that they can earn returns higher or guaranteed profits than all other investors. 2. Initial trust is developed by victim-investor that investment is sound but based on special inside information; "It's a privilege to participate"! 3. Scam (Ponzi) artist pays investment "profits" with new funds taken from newer investors ("rob Peter to pay Paul") 4. More investors, learning of the success, infuse more funds, thereby perpetuating the scheme. They "let it ride" to gain more "profit"

Security

1.Stock certificate, bonds or other evidence of a right to share in the asset distribution of a profit making enterprise. 2.Written assurances for the return or payment of money. (A Loan or debt instrument e.g. an IOU)

investment

A monetary asset purchased with the idea that's the asset will provide income in the future (pension plan) OR will be sold at a higher price for a profit. Most investments involve some form of security acquisition Most financial crime will usually involve some form of fraud connected to or associated with "securities" obtained as investments

Ponzi

A ponzi is an investment fraud where victims place their money with an individual or company believing they will earn a stable, high rate of return on their investment Offender generates investment returns for older investors through revenue generated from new investors No actual investments (stock trades and other securities) are transacted. Offender keeps all investor money for himself-outright theft

"proprietary trading model"

A term used by Madoff to keep his trading "formula" secret; his "secret sauce" "split strike conversion" A complicated, complex method of securities trading that uses mathematical formulas to know when to buy or sell securities

due diligence

An obligation a broker or other fiduciary has to make sure that their client "trades" were actually executed

Historical Perspectives of Corruption

Concerns about corruption prompted the establishment of term limits for elected officials within the US Constitution How long should a President sit? (4 years) US Senator? (6 years) (each state 2 senators no matter the size of the state) US House of Representative? (2 years) (435 members - based upon proportion to its state population. E.g. California 53, Delaware 1)) (Census every 10 yrs) Federal Judges NOT elected - appointed for life

Info on corporations

Corporations are treated as an "individual person" in that corporations can enter into contracts and be held liable for civil and criminal violations For example corporations can borrow money, buy and sell property, and sue individuals and other corporations Corporations have some constitutional rights pursuant to the 14th Amendment (due process) except that corporations have no 5th Amendment privilege against self incrimination. Criminal prosecutions against corporations must show that the "corporate mind" committed the fraud or the alleged criminal violations

Stock Churning

Excessive trading (buying and selling) in a customer's account to give profit to the broker, not the investor (broker makes fees when stock is bought and sold) Securities are actually traded by the broker for the investor but with the purpose of brokers earning investor fees True violation of "fiduciary obligations"

Jordan Belfort- Stratton Oakmont (Wolf on Wall Street) - case study

Founded Stratton Oakmont Inc. in 1989, on Long Island NY. Stratton was a stock brokerage firm that handled "penny stocks" also called "micro cap" stock Transactions were handled "OTC" (over the counter) meaning the trade was conducted outside of an "exchange" (NYSE or NASDAQ) OTC transactions were not subject to many inspections by the SEC so many transactions were executed "under the radar" Stratton convinced many investors to buy "penny" stocks that Stratton had already purchased at low rates Company employed up to 1,000 stockbrokers and had approx $1 Billion under management (Pump) Belford's company purchased penny (almost worthless) stocks for themselves. They then misrepresented the value of the stock to their clients to induce them into purchasing the stock. Client purchases drove up the value of the penny stock through misrepresentations from Oakmont brokers about the viability and future (Dump) Once the penny stock was "jacked up" Stratton sold their own stock in the company at the higher rate price making millions for Stratton Oakmont. Individual investors lost over $200 million when they were defrauded into purchasing thousands of shares of stock worth only pennies Belfort and others were arrested in 1998 for securities fraud and money laundering by the FBI Belfort spent 22 months in prison and required to pay $110 million in restitution AND prohibited from financial activities career Steve Madden also indicted and convicted of securities fraud.

U.S. Securities and Exchange Commission (S.E.C.)

History: Created by the Securities Exchange Act of 1934 Independent Commission appointed by the President of the US What is their authority? The Security and Exchange Commission is the civil regulatory agency that administers the laws governing the securities industry Their mission is primarily regulatory in nature Violations of the Security Exchange Act can be civil, criminal, or.... both The SEC requires "publicly held" corporations to submit quarterly and annual reports "10 Q and 10 K" for review

Public Corruption- Prosecution

Investigation and Prosecution · Cases are often more difficult than other white collar crimes in that it is sometime hard to "define" the behavior of the official · Normally evidence requires a "quid pro quo" situation to show suspect gained value from their actions · Wiretapping (electronic surveillance) and document examination are the most credible and material types of evidence

Investment fraud

Investors look at several factors of publicly traded corporations: Does the corporation make money? How do we know? Corporate Prospectus is a LEGAL document which describes the history, management, purpose, assets and risks associated with the company Business journals; Forbes, Barrons, Bloomberg, Wall Street Journal, etc. are all sources that report on investment opportunities Will the corporation continue to make money? Is the company stable? Is the financial status of the company audited by an "independent accounting firm" which attests to the accuracy of the corporation's records of profits and losses (the balance sheet)? How are corporate officers compensated? Salary Bonuses Stock options!!!!

Public Corruption- Legislation Branch

Legislative: likely to see contributions to campaigns in return for favorable legislation, access, or public projects Bribery is the most prosecuted criminal offense with legislators ABSCAM, (Abdul-Scam) FBI sting operation in 1978-1979 that caught a U.S. Senator, multiple U.S. congressmen, city councilman, and a mayor.

Madoff's Plan

Madoff DID NOT HAVE A PLAN EXCEPT to STEAL MONEY! Began with an existing brokerage firm; he was known in the "trading" industry Madoff initially used "feeder firms"; companies who manage investors' money and place it into high yield securities. Feeder funds make an administrative fee for managing the investment- paid by the investor. Feeder funds guaranteed investors a return with "Promissory Notes" (IOUs) Madoff also promised feeder funds a % of return. The more Madoff said the investment was paying; the more the feeder funds made. Madoff paid real money to feeder firms- not the victims (unless they wanted out) Madoff fabricated the return on investments to show better than average return and "immune" to "bear-bull" volatility When questioned; he said he possessed a "proprietary trading model" which was his secret to trading success; "the Black Box" Actually Madoff placed all investors' funds into his own Chase account; and paid any returns (redemptions) from that account. MADOFF'S PLAN Madoff's legitimate brokerage firm was used as a "shill" to convince investors of the authenticity of the firm Feeder firms failed to use "due diligence" to see that the money they were managing was properly invested as designed. They were blinded by the commission of the "rate of return"; and didn't want to loose Madoff as their investment advisor Even when the "equities market" (mostly real estate) began to tank mostly from the housing depression, investors still believed Madoff's investment "model" was stable. The housing market depression of 2008 caused investors to pull money out of Madoff's investments to cover other investment shortfalls or operating costs. Madoff could not cover the enormous demands for withdrawal requests

ABSCAM (legislative corruption)

March 1978, swindler Mel Weinberg and girlfriend Evelyn Knight were facing prison terms when FBI agents allowed them to cooperate in return for probation Undercover FBI agents created "ABDUL Enterprises" FBI deposited $1,000,000 in a Chase account to show the company had money to buy access Initial corruption scheme was to provide a casino in Atlantic City through mayor of Camden Camden mayor invited many congressmen and Philadelphia officials to grant access for fictional Arab sheiks Public officials accepted cash bribes of $50,000 and up in return to provide immigration favors, locate businesses in voting districts, establish a mining company, etc. ALL VIDEOTAPED by the FBI Defense was that the FBI engaged in entrapment. Most if not all were convicted and given various prison sentences

Mark Cuban- Case Study

Mark Cuban, 55 owner of the Dallas Mavericks Net worth $2.4 billion Subject of a 2008 civil action by the SEC for insider trading Cuban was accused of using non public information to sell 600,000 shares of mama.com a search engine company to avoid a $750,000 loss After Cuban sold his shares, Mama.com stock dropped 9.3% Cuban's defense was that information was already known Cuban cleared of all liability on October 16, 2013

Campaign contribution

Money Given to politicians to get them elected US Supreme Court in the McDonnell decision said "corruption" in campaign requires more than intent on the part of the gift giver- what was the direct reward? It requires something like an explicit deal between the giver and receiver. The receiver must perform an "official act" for the deal.

Public Corruption- Judicial

Not as common as legislative corruption · Bribes, gifts, and campaign contributions in return for favorable dispositions of trials Examples: Common Pleas judges taking kickbacks for sending juveniles to private detention facility (Kids for Cash federal prosecution in Scranton PA)

Pump and dump

Providing fabrication of the value of a security to affect the market value of the stock or bond; allowing others to "pump" up or down the value. Stratton- Oakmont Jordan Belfort promotimng IPO Steve Madden Shoes https://youtu.be/QI-_d-X0LwY https://youtu.be/2opHVFriE8o ENRON- Corporate attempt to inflate value of stock when company was going bankrupt Also involves other new IPO's (Initial Public Offering) stock which are hard to research

Ex. public corruption- executive branch

Robert Francis McDonnell (born June 15, 1954) is an American politician and lawyer who served as the 71st governor of Virginia On January 21, 2014, McDonnell and his wife, Maureen, were indicted on federal corruption charges for receiving improper gifts and loans from a Virginia businessman (Jonnie Williams Sr., former CEO of Star Scientific) "Anatabine" Both were convicted on most counts by a federal jury on September 4, 2014 Governor McDonnell was sentenced to two years in federal prison On June 27, 2016, the US Supreme Court vacated the conviction and remanded it back to a lower court, "official act" was too broad for "quid pro quo" In September of 2016, the Justice Department announced that they would not prosecute the case again, and moved to dismiss the charges against the former governor and his wife. At issue was did McDonnell provide some assistance to accompany in return for gifts of vacations, jewelry, clothes, cars, totaling $135,000.

SAC Capital- case study

SAC Capital founded by Steven A Cohen Cohen was educated at the Wharton School, University of Pennsylvania In 1992 he started SAC Capital as a hedge fund manager Currently Cohen is the 30th richest person in the US In 2009 SAC managed $14 billion in securities 2012 SAC Capital Inc. was implicated in insider trading involving a pharmaceutical stock and ex SAC employee, Matthew Martoma was criminally indicted along with seven others 2014 Martoma was convicted of insider trading after extensive use of FBI wiretapping. First major white collar case where a federal wiretap (Title III) was employed. SAC Capital Inc. was criminally indicted for insider trading. SAC Corporation pleaded guilty of insider trading and was fined $1.8 Billion The SEC also filed an individual civil case against Cohen, which he settled for $135 Million and a promise not to manage securities until 2018

what is a bribe

Something given for something in return. "quid pro quo"** **Latin= "this for that"

Stock Trading 101

Stocks are never really "traded" (like baseball cards) a stock "trade" means to BUY or SELL a stock (share of ownership in a company) Approximately one billion "shares" of publicly held stock are "traded" every day. Publicly held stock are stock shares anyone can buy. How does one execute a "trade" Through the exchange floor (NYSE- New York Stock Exchange) Electronically on line (E Trade, AmeriTrade) Either way, a "trade" requires a human or virtual "broker" (and fees) to complete the trade How are stock prices set? Mostly by Supply and Demand If the demand for the stock increases, the price will rise If many shareholders decide to sell stock; there will be more stock available (more supply) so the price will naturally fall How does one try to make money in the stock market? Buy the stock at the low point; (BUY LOW) and sell it at the high point (SELL HIGH)

Phil Mickelson- Case Study

Uncle Phil- Insider trading three steps removed William (Billy) Walters was charged with securities fraud, conspiracy and wire fraud. Prosecutors argued that from 2008 to 2014 William (Billy) Walters made more than $43 million from trades of Dean Foods by realizing profits and avoiding losses thanks to information he had obtained from former company chairman Tom Davis. Walters inside trading case also involved PGA star, Phil Mickelson. At the advice of Walters, Mickelson began to trade in Dean Foods stock between July and August 2012, amassing $931,000. Mickelson's activity was used as evidence against Walters but Mickelson would refuse to testify and invoke his 5th Amendment right. The government could not prove that Mickelson KNEW where the advice was coming from only that Mickelson profited through the insider trading deal. Mickelson "settled" with the government by surrendering $931,000. plus interest totaling $100,000 Mickelson neither admitted nor denied the SEC complaint of inside trading.

stock manipulation

Use of Internet or other media to artificially create value in a valueless security and solicit trading for that stock Theranos - Elizabeth Holmes- "Youngest Billionaire"

Madoff- Lessons learned

Victims had trust in their brokers and advisers and believed their investments were safe Victims believed they had "exclusive" investment opportunities Greed allowed "feeder funds" to ignore their responsibility to conduct "due diligence" in checking that trades were secure and legitimate Madoff had so much money in play ($65 billion) that regulatory agencies (SEC) could not believe any fund that big could be fraudulent Madoff's legitimate brokerage firm added legitimacy to his operation Panic redemptions (withdrawals) doomed the Ponzi

how do insiders violate the law?

When corporate directors, officers, control personnel and brokerage firms trade (buy or sell) company stock by knowledge unavailable to the public Insider trading can affect either profit OR avoid a loss. "knowing what horse will win before the race starts" "Front Running" a form of insider trading common with a brokerage firm. They buy or sell stock for themselves before buying for their clients. Also when one broker tips off another of a transaction in return for a kickback. Blackout Periods- days when insiders may not trade on corporation securities//stocks

Insider trading

Who are insiders? Officers (CEO, CFO, COO, President, VPs) of the publicly held corporation Directors (Board of Directors)- they make strategic decisions Principal stockholders (10% ownership or more) and their immediate families Affiliated persons or control persons (brokers with knowledge of mergers, accountants, actuaries, support staff) General counsel (lawyers for the corporation) Researchers who have direct knowledge of how a product may affect the financial future of a publicly traded company

Fiduciary

anyone who accepts the obligations to exercise reasonable care with the financial assets of another

General methods of public corruption

extortion, bribery, lobby, campaign contribution

Public Corruption

involves a breach of public trust and/or abuse of position by federal, state, or local officials and their private sectors accomplices. By broad definition a government official whether elected, appointed or hired, may violate federal law when he/she asks, demands, solicits, accepts, or agrees to receive anything of value in return for being influenced in the performance of their official duties. WEX - Cornell University Law School

Bribery

occurs when a private party pays an official for influence or a particular favor.

Extortion

occurs when a public official demands payment for something he is already suppose to do.

Lobby

to try to influence government officials to make decision for or against something. The line between lobbying v. bribery is intentionally confusing The government official cannot serve two masters

Specific Public Corruption federal statutes include:

· Bribery · Foreign Corrupt Services Act · Mail Fraud · "Honest Services Fraud" (conflicts of interest) · Forgery · "Hobbs Act" (coercion under "color of law") · Money Laundering · RICO (Racketeering Influenced Corrupt Organization)

Public officials are either

· Elected officials- (more difficult to remove from office)- usually must wait till sentencing for a criminal conviction · Appointed officials- usually are "at will" employees and can be fired from the position

examples of simple fiduciary fraud

· Embezzlement by an employee · Misappropriation of a decedent's last will by an executor, trustee, family member or attorney

Types of Securities Fraud

· INSIDER TRADING · STOCK MANIPULATION · "PUMP AND DUMP" · STOCK CHURNING

example of a complex fiduciary fraud

· Misrepresentation of the value of an investment or placing one's investment into a high risk status without the knowledge of the investor.....for the benefit of the fiduciary

eventually Ponzi's collapse when:

· No new investors to infuse additional funds · Discovered by regulatory agencies (SEC, FBI) · Investor Panic causes mass withdrawals that offender cannot provide

State and municipal corruption

· Usually kickbacks for the award of public contracts Philadelphia School executives awarding security camera contract to non-approved vendors. · Or to disable political opponents (NJ Bridgegate) · Or appointments to positions (Governor Blagojevich selling Obama's senate seat) · Or for consideration in current or future prosecution